INVENTORIES PART 1

DISCUSSION PROBLEMS
I.​ MCQ
1.​ Inventories are assets:
a.​ Held for sale in the ordinary course of business.
b.​ In the process of production for sale in the ordinary course of business.
c.​ In the form of materials or supplies to be consumed in the production process or in the rendering of services.
d.​ Held for use in the production or supply of goods or services.
e.​ Held for use in the production or supply of goods or services.
f.​ Held for administrative purposes.

2.​ Which statement is correct regarding inventories?

a.​ Inventories are monetary assets.
b.​ Inventories are financial assets.
c.​ Inventories should have physical form.
d.​ Inventories are reported as a separate line item in the statement of financial position.

3.​ La Union Corp. is considering the following items for inclusion in ‘Inventories’:
●​ Materials on hand​ ​ ​ ​ ​ ​ ​ ​ P1,200,000
●​ Materials in transit shipped FOB shipping point ​​ ​ ​ ​ 470,000
●​ Materials in transit shipped FOB destination ​ ​ ​ ​ ​ 350,000
●​ Advances for materials ordered ​​ ​ ​ ​ ​ ​ 200,000
●​ Goods in process​ ​ ​ ​ ​ ​ ​ ​ 900,000
●​ Finished goods in factory​ ​ ​ ​ ​ ​ ​ 3,000,000
●​ Finished goods in company-owned retail stores, including 50% profit on cost ​ 750,000
●​ Finished goods in hands of consignees including 40% profit on sales ​ ​ 400,000
●​ Goods held on consignment, at sales price, cost P150,000 ​ ​ ​ 300,000
●​ Finished goods in transit to customers, shipped FOB seller, at cost ​ ​ 250,000
●​ Finished goods in transit to customers, shipped FOB buyer, at cost 150,000
●​ Unsalable finished goods, at cost ​ ​ ​ ​ ​ ​ 30,000
●​ Office supplies ​ ​ ​ ​ ​ ​ ​ ​ ​ 40,000
●​ Advertising catalogs and shipping boxes ​ ​ ​ ​ ​ 150,000
Compute the amount to be presented as ‘Inventories’ under current assets.
a. P6,460,000​ ​ b. P6,510,000 ​ ​ c. P6,560,000​ ​ d. P6,610,000

4.​ The inventory on hand at Dec. 31 for Fair Company valued at a cost of P947,800. The following items were not included
in this inventory amount:
●​ Purchased goods, in transit, shipped FOB destination invoice price P32,000 which included freight charges of
P1,600.
●​ Goods held on consignment by Fair Company at a sales price of P28,000, including sales commission of 20% of
the sales price.
●​ Goods sold to Garcia Company, under terms FOB destination, invoiced for P18,500 which includes P1,000
freight charges to deliver the goods. Goods are in transit.
●​ Purchased goods in transit, terms FOB origin, invoice price P48,000, freight cost, P3,000.
●​ Goods out on consignment to Manil Company, sales price P36,400, shipping cost of P2,000.
Assuming that the company's selling price is 140% of inventory cost, the adjusted cost of Fair Company's inventory at
Dec. 31 should be:
a. P1,055,700​ ​ b. P1,039,500​ ​ c. P1,039,300 ​ ​ d. P1,037,300
5.​ What is the principle for recognition of inventory in accordance with PAS 2?
a.​ Recognition of inventory is not specified in PAS 2.
b.​ Inventory is recognized when, and only when, the entity obtains the risks and rewards of ownership of inventory
and has the ability to dispose of the inventory
c.​ Inventory is recognized when, and only when, the entity becomes a party to a purchase commitment.
d.​ Inventory is recognized when, and only when, it is probable that future economic benefits will flow to the entity
and the cost or value of the inventory can be measured reliably.

6.​ In accordance with PAS 2, inventories are required to be measured at the

a.​ Cost ​ ​ ​ ​ ​ c. Net realizable value
b.​ Fair value less costs to sell ​ ​ d. Lower of cost and net realizable value

7.​ The closing inventory at cost of a company amounted to P284,700. The following items were included at cost in the
total:
i.​ 400 coats, which had cost P80 each and normally sold for P150 each. Owing to a defect in
manufacture, they were all sold after the reporting date at 50% of their normal price. Selling expenses
amounted to 5% of the proceeds.
ii.​ 800 skirts, which cost P20 each. These too were found to be defective. Remedial work costs P5 per
skirt and selling expenses for the batch totaled P800. They were sold for P28 each.
 What should the inventory value be according to PAS 2 Inventories after considering the above items?
a. P281,200 ​ ​ b. P282,100 ​ ​ c. P282,800 ​ ​ d. P329,200

8.​ The following figures relate to inventory of materials held at Dec. 31:
Item X ​​ ​ Item Y
Cost ​ ​ ​ ​ ​ ​ P200,000 ​ ​ P400,000
Replacement cost ​ ​ ​ ​ 180,000 ​ ​ 370,000
Estimated costs to convert materials
into finished goods ​ ​ ​ ​ 100,000 ​ ​ 200,000
Estimated selling price of finished goods ​ 320,000 ​ ​ 610,000
Estimated costs to sell ​ ​ ​ ​ 10,000 ​ ​ 15,000
The entity should recognize loss on write-down of inventory of materials of
a. P50,000​ ​ b. P30,000 ​ ​ c. P5,000 ​ ​ d. Nil

9.​ Which is not a required disclosure for inventories in accordance with PAS 2?
a. Inventory costing methods employed. ​. ​ c. Inventory financing arrangements.
b. Inventory composition ​ ​ ​ d. Inventory location.

10.​ On Jan. 1, 2023, Pastille Corp. signed a three-year noncancelable purchase contract, which allows Pastille to purchase
up to 500,000 units of a computer part annually from Pyramid Supply Co. at P10 per unit and guarantees a minimum
annual purchase of 100,000 units. During 2023, the part unexpectedly became obsolete. Pastille had 250,000 units of
this inventory at Dec. 31, 2023, and believes these parts can be sold as scrap for P2 per unit. What amount of probable
loss from the purchase commitment should Pastille report in its 2023 profit or loss?
a. P2,400,000 ​ ​ b. P2,000,000​ ​ c. P1,600,000 ​ ​ d. P 800,000

III. INVENTORY: YES OR NO

​ 1. Dogs that a pet shop buys from breeders that it then sells
2. Equipment held for sale in the ordinary course of business
3. Equipment held for sale in accordance with PFRS 5
4. Lubricants that are consumed by an entity’s machinery in producing goods
5. Materials on hand
6. Materials in transit shipped FOB shipping point
7. Materials in transit shipped FOB destination
8. Advances for materials ordered
9. Goods in process
10. Finished goods in factory
11. Finished goods in company-owned retail stores
12. Finished goods in hands of consignees
13. Goods held on consignment
14. Finished goods in transit to customers, shipped FOB seller
15. Finished goods in transit to customers, shipped FOB buyer
16. Unsalable finished goods
17. Office supplies
18. Advertising catalogs and shipping boxes
19. Land held for sale in the ordinary course of business
20. Land and building for rental to others

III. PROBLEM SOLVING

1.​ On Nov. 15, 2022, Socrates entered into a commitment to purchase 200,000 units of raw material X for P40 per unit to
be delivered on Mar. 15, 2023. The contract cannot be cancelled. Socrates entered into this purchase commitment to
protect itself against the volatility in the price of raw material X. By Dec. 31, 2022, the purchase price of material X had
fallen to P35 per unit. 39.
a.​ How much will be recognized as loss on purchase commitment on Mar. 15, 2023 if the price of the
material had fallen further to P32 per unit?
b.​ How much will be recognized as gain on purchase commitment on Mar. 15, 2023 if the price of the
material had risen to P42 per unit?

2.​ The Refenjol Corp. included the following in its unadjusted trial balance as of December 31:
a.​ Inventory, 1/1 P 19,450,000
b.​ Purchases 127,850,000
c.​ Available for sale P147,300,000
i.​ The inventory at December 31 was counted at a cost of P14.5 million. This includes P500,000 of slow
moving inventory that is expected to be sold for a net amount of P300,000.
The cost of sales for the year is?
 3.​ Caravana Development Corporation bought a 10 hectare land in Novaliches, to be improved, subdivided into lots, and
eventually sold. The purchase price of the land was P58,000,000. Taxes and documentation expenses on the transfer of
the property amounted to P800,000. The lots were classified as follows:
Lot class ​ Number of lots ​ ​ Selling price per lot ​ Total clearing costs
A​ ​ ​ 10 ​ ​ P1,000,000​ ​ ​ None
B​ ​ ​ 20​ ​ 800,000 ​​ P1,000,000
C​ ​ ​ 40 ​ ​ 700,000 ​​ 3,000,000
D​ ​ ​ 50 ​ ​ 600,000 ​​ 8,000,000
The cost per lot of class B lots under the relative sales value method of inventory valuation is ?

4.​ Roweena Corp. began operations in the current year. During the year it incurred the following expenditures in
purchasing materials for producing its product:
a.​ Purchase price of raw materials = P3,000,000
b.​ Import duty and other non-refundable purchase taxes = P800,000
c.​ Refundable purchase taxes = P100,000
d.​ Freight costs for bringing the goods from the supplier to the factory raw material storeroom = P300,000
e.​ Costs of unloading the materials into the raw material storeroom = P2,000
f.​ Packaging = P200,000
The entity received P53,000 volume rebate from a supplier for purchasing more than P1,500,000 from the supplier during the
year. The entity incurred the following additional costs in the production run:
g.​ Salary of the machine workers in the factory = P500,000
h.​ Salary of factory supervisor = P300,000
i.​ Depreciation of the factory building and equipment used for production process = P60,000
j.​ Consumables used in the production process = P20,000
k.​ Depreciation of vehicle used to transport the goods from the raw materials storeroom to the machine
l.​ floor = P40,000
m.​ Factory electricity usage charges = P30,000
n.​ Factory rental = P100,000
o.​ Depreciation and maintenance of the entity’s vehicle used by the factory supervisor (50 per cent for official use
and 50 per cent for personal use) = P20,000. Private use of the vehicle is an employee benefit.
The entity incurred the following administration expenses:
p.​ Depreciation of the administration building = P50,000
q.​ Depreciation and maintenance of vehicles used by the administrative staff = P15,000
r.​ Salaries of the administration personnel = P305,000 Of the administration expenses 20 per cent are attributable
to administering the factory. The rest of the administration expenses are attributable, in equal proportion, to the
sales and other non-production operations (e.g. financing, tax and corporate secretarial functions).
The entity incurred the following selling expenses:
s.​ Advertising costs = P30,000
t.​ Depreciation and maintenance of vehicles used by the sales staff = P10,000
u.​ Salary of the administration personnel = P600,000

The total costs of purchase is?

The total cost of conversion is?

5.​

The ending inventory on a FIFO basis is

The ending inventory on an average-cost basis is
The ending inventory on an average cost basis is

6.​ Catapult Corp. purchased merchandise during the year on credit for P200,000; terms 2/10, n/30. All of the gross liability
except P40,000 was paid within the discount period. The remainder was paid within the 30-day term. At the end of the
annual accounting period, 90% of the merchandise had been sold and 10% remained in inventory. The entity has no
beginning inventory. The entity uses a net method of recording purchases. If the entity used the gross method of
recording purchases instead of the net method, the reported cost of goods sold would have been?
7.​ Buyer Co. regularly buys shirts from Vendor Company and is allowed trade discounts of 20% and 10% from the list
price. Buyer purchased shirts from Vendor on May 27 and received an invoice with a list price of P100,000 and payment
terms 2/10, n/30. If Buyer uses the net method of recording purchases, the journal entry to record will be?

8.​ Which is correct regarding write-down of inventory to net realizable value?

a.​ Materials and other supplies held for use in the production of inventories are not written down below cost if the
finished products in which they will be incorporated are expected to be sold at or above cost.
b.​ When a decline in the price of materials indicates that the cost of the finished products exceeds net realizable
value, the materials are written down to net realizable value. In such circumstances, the best available measure
of the net realizable value of materials is the replacement cost.
c.​ Both a and b.
d.​ Neither a nor b.

9.​ Which statement is incorrect regarding net realizable value (NRV)?

a.​ NRV refers to the net amount that an entity expects to realize from the sale of inventory in the ordinary course of
business.
b.​ NRV is an entity-specific value.
c.​ NRV for inventories may not equal fair value less costs to sell.
d.​ Estimated costs necessary to make the sale are limited to incremental costs when determining NRV.

10.​ Which statement is incorrect regarding reversal of inventory write-down to net realizable value?
a.​ If the selling price of inventory that has been written down to net realizable value in a prior period, subsequently
recovers, the previous amount of the write-down can be reversed.
b.​ The reversal is limited to the amount of the original write-down.
c.​ The amount of any reversal of any write-down of inventories, arising from an increase in net realizable value,
shall be recognized as a reduction in the amount of inventories recognized as an expense in the period in which
the reversal occurs.
d.​ None, all the statements are correct.